Published on March 3, 2014
PreView Protiviti’s View on Emerging Risks Volume 1, Issue 1 “Emerging risks may not be fully understood or identified, and hence, comprehensive risk management options to assess, quantify, monitor and develop response plans are difficult for organizations to design and implement.” Foreword As more organizations continue to evolve their risk governance practices, focused and relevant information about emerging risks is at a premium. The objective of Protiviti’s PreView newsletter is to provide an input for these efforts as companies focus on risks that are developing in the market. We view emerging risks as those that are newer to an organization or are the result of macro-level changes; therefore, we see these risks as distinctly different from evolving risks that have been previously identified and are shifting from their original conditions or risk levels. We realize that emerging risks may not be fully understood or identified, and hence, comprehensive risk management options to assess, quantify, monitor and develop response plans are difficult for organizations to design and implement. We hope this PreView newsletter serves as a thought-provoking piece in organizations’ consideration of emerging risks, particularly those risks that may have a direct impact on them, as businesses undertake steps to evolve and adapt progressive risk management practices. Our framework for evaluation is rooted in the Global Risk Categories designed by the World Economic Forum. Throughout this series, we will continue to use these categories as a framework for classifying macro-level topics and the challenges they present. In closing, we are very interested in your feedback. We plan to continue the conversation on emerging risks in our blog, “The Protiviti View” (blog.protiviti.com), and on our microsite (www.protiviti.com/emergingrisks). We welcome your input and comments. Economic Technological Societal Emerging Risks Environmental Geopolitical Inside This Issue • • • • • • • • Mobile Banking: A Departure from Branch Expansion Food: A Spending Split with Healthcare Ramifications Emerging Middle Class: Shift in Education and Implications Human Capital: The Aging Workforce Emerging Risk Spotlight: Social Media Lending On the Radar Where to Learn More The Protiviti View – Continuing the Conversation on Our Blog Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 7 Page 8 Protiviti • www.protiviti.com 1
Mobile Banking: A Departure from Branch Expansion Economic Key Industries Impacted Financial Services; Technology, Media and Communications; Retail Brought on by advances in technology and changes in customer modality, we are in the midst of a paradigm shift in banking. The number of smartphone users will continue to rise, and banks are engaged in an unrelenting pursuit of improved mobile banking applications – shifting focus to gaining mobile market share rather than traditional physical expansion of brick-and-mortar locations. Advancing mobile banking applications are forcing banks to reconsider the branch banking strategy. Customer choice behaviors will continue to play out as mobile banking evolves, which will continue to present opportunities and risks to banks and customers alike. The Rise of the Mobile Bank Bank branches Smartphone users 100,000 250 90,000 U.S. Bank Facilities 200 70,000 60,000 150 50,000 40,000 100 30,000 20,000 50 10,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 U.S. Smartphone Users (in millions) 80,000 0 Source: Branch Totals: FDIC data 2007-2012; 2013-2016 based on an estimated potential projection of U.S. smartphone users: actuals and projections via Statista: www.statista.com/statistics/201182/ forecast-of-smartphone-users-in-the-us/. Key Considerations and Implications • Services that were traditionally provided through in-person banking are gaining popularity on mobile banking devices and will continue to be explored as a means to grow clientele and reduce expense pressures associated with physical bank branches. • The decline in the number of bank branches began in 2010, and the long-term effects on local real estate and job markets are yet to be determined. • Cybersecurity and maintaining compliance with certain regulations such as customer identification will continue to present risks to the industry, and the reputation impact is yet to be determined. • Disenfranchisement of non-mobile banking customers will need to be monitored and could spawn the onset of “boutique-style” bank players in the market. Protiviti • www.protiviti.com 2
Food: A Spending Split with Healthcare Ramifications ECONOMIC Key Industries Impacted Healthcare; Insurance The United States will face challenges in addressing the healthcare epidemic as less healthy food options remain costeffective to consume, and social classes have a greater gap to bridge. Additionally, a paradigm shift may alter many Americans’ approach to healthy body weight as obesity is increasingly perceived and treated as a disease. A transition toward reliance on treatment could pull focus from making healthy lifestyle choices. Proportional Food Spend Limits Ability of Lower Classes to Allocate More Money for Pricier, Healthier Options Percentage of Income Spent on Food 40 30 20 10 0 Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Income Quintiles Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Shares Table, 2011. Key Considerations and Implications • Since 1980, the cost of healthy, nutrient-dense foods has increased (e.g., fruit and vegetable prices have gone up more than 40 percent), while the cost of less healthy, calorie-dense options has decreased (e.g., butter and soft drinks have gone down about 30 percent). • More of our population is gaining weight; estimates state that 42 percent of adults will be obese by 2030. • Current estimates of annual medical costs attributable to adult obesity are between $147 billion and $210 billion, with costs rising to add another $50 billion per year by 2030. • The better availability and lower cost of less healthy food options will intensify the challenges the American healthcare system faces as the obesity epidemic continues to worsen, with the potential outcome being increased regulation or taxes on certain goods. • The American Medical Association recently classified obesity as a disease, shifting focus from illnesses caused by extra weight to defining excess weight as an illness itself, and essentially classifying one-third of the American population as being sick. • As healthcare costs spiral upward, employers may focus on workplace wellness programs to improve employee health, such as necessary health screenings and greater opportunities for physical activity, with the objective of controlling healthcare costs through measurable returns on investment. Protiviti • www.protiviti.com 3
Emerging Middle Class: Shift in Education and Implications Environmental Key Industries Impacted Healthcare; Insurance; Financial Services Unemployment is a manifestation of a number of structural faults: Growth is too often unsmooth and directly linked to boom/bust cycles; global population is rising; and there is an increasing gap among education, skills and jobs. In addition, income disparity issues will continue to widen and affect access to higher education for the middle class. Shift in Education by Regions Tertiary Degree Graduates, Ages 25-34 (in millions) 60 2000 50 2010 2020 40 30 20 10 0 United States China India Russia Brazil Source: “Polls and Stats: Emerging Markets Lead Higher Education Grads,” Global Finance, November 2012: www.gfmag.com/archives/164november-2012/12100-polls-and-stats-emerging-markets-lead-higher-education-grads.html#axzz2btq51gBB. Key Considerations and Implications • With the growing cost of education in the United States, many may consider whether other pursuits (e.g., online education, emerging skilled trades) will generate opportunities for wealth similar to those resulting from a traditional college education. • From 2002 to 2011, the average cost of a bachelor’s degree increased from $66,000 to $87,000, while the average starting salary for college graduates decreased from $62,000 to $55,000. Such a shift might signal greater selectivity on the part of students regarding degrees to pursue, as well as on the part of universities regarding degrees they offer. • In 2009, North America’s share of the global middle class was 18 percent, versus Europe at 36 percent, Asia Pacific at 28 percent, and Central/South America at 10 percent. In 2020, projected share of the global middle class for Asia Pacific (largely in China and India) will increase to 54 percent as opposed to the stagnant growth trend in North America and Europe. • A decline in Americans seeking education and an increase in developing countries’ education could challenge the U.S. job market. As a result, companies might increase their international recruiting efforts for U.S. jobs, or they might shift jobs to developing countries with rising middle classes. Protiviti • www.protiviti.com 4
Human Capital: The Aging Workforce Societal Key Industries Impacted Consumer Products & Services; Energy; Financial Services; Healthcare; Industrial Products; Private Equity; Technology & Media As the 77 million members of the baby boomer generation reach the traditional age of retirement, there will be a significant change to the demographics of the U.S. workforce. Employers will be able to leverage the experience and technological adaptability that characterizes the baby boomer generation and address a looming labor shortage in the younger workforce if they can develop necessary workplace strategies and accommodations. Increasing Labor Force Participation and Share of Total Employment Among Older Workers Labor Force Participation Rate 65+ 22% Share of 55+ in Employment 20% 18% 16% 14% 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 10% 1985 12% Source: U.S. Bureau of Labor Statistics. Key Considerations and Implications • Due to desire and financial need, many baby boomers will look to work past the traditional age of retirement. • Since 2000, the number of U.S. workers ages 45 and older has increased by 13.9 million, while the number of workers ages 25-44 has fallen by 6.8 million. • By 2020, approximately 50 percent of the U.S. population will be over 50 years old. • Companies will increase their focus on their processes for acquiring, developing and retaining talent as the baby boomer generation approaches retirement. Longer life expectancies are straining existing pension plans and changing retirement paradigms. In addition, as the workforce ages, healthcare costs and disability rates increase. • Companies will likely consider alternative staffing models that provide more flexibility, such as part-time arrangements and contractors for retaining or replacing talent. • Organizations may look to invest in alternate job execution techniques – assistive technology, for example – to retain experienced employees longer. Protiviti • www.protiviti.com 5
Emerging Risk Spotlight: Social Media Lending Technological Key Industries Impacted Financial Services; Technology & Media Online reputation as a basis for lending, where a borrower’s creditworthiness is determined based on his or her social media data rather than the traditional credit score, has emerged with the rapid growth of online communities. Market Spotlight Lenddo • Offers small loans to 150,000 members, mostly in emerging markets, enabling them to build creditworthiness and access local financial services using online social connections. • Received $8 million in funding from investors. Neo Finance, Inc. • Prices and offers car loans based on actual income and social data. Affirm Inc. • Accelerates smartphone purchases by paying merchants upfront; users have 30 days to settle debt. Background How it works: • Information is collected from various social media sources (e.g., Facebook, LinkedIn, Twitter). • Proprietary algorithms generate a borrower “score” determining the user’s creditworthiness and lending limit. Target customers: • Young adults/entrepreneurs without comprehensive credit histories and borrowers in developing nations without credit histories/identity profiles (“emerging markets”). Sample criteria: • Age, education, career data (e.g., industry, geography, tenure). • Number and positions of the user’s network connections. • Endorsement of the borrower’s reputation by individuals within their network. Limitations: • Reputation is contextual and difficult to infer from traditional criteria. • Data is only as valuable as the information a customer is willing to share. • The social media privacy landscape is evolving and has not felt the full breadth of regulatory impact. • The shelf life of social media platforms is unpredictable (e.g., the declining popularity of MySpace). Future Consideration • Over time, social media disclosures and behavior might provide lenders with a source for validating information and a predictive profile of creditworthiness in the underwriting process. At the same time, social media lending can create unique and complex fair lending compliance issues and increased reputation risk with consumers. Protiviti • www.protiviti.com 6
On the Radar Bitcoin Phenomenon Launched in 2009, Bitcoins have been gaining momentum as the pioneering digital currency. An electronic payment system based on cryptographic proof instead of one that relies on third-party financial institutions to execute transactions, Bitcoin allows two willing parties to transact directly online. This direct method of transactions via servers could be conducive to suspicious trades, such as money laundering or illegal goods and services, and currently lacks a central monetary authority. Bitcoin prices are notorious for fluctuating wildly: on April 10, 2013, the value reached a peak of $266, subsequently crashed down to $76 and then bounced back to $160 in a matter of six hours, and as of January 21, 2014, prices were as high as $865 on exchange sites after peaking at over $1,200 in November 2013. The Rise of Municipal Instability Two common factors in recent municipal bankruptcy filings are underfunded pension liability and excessive bond issuance. Cities, villages and towns are taking on increasing debt, leading to significant growth in the municipal bond market and implying that excessive bond issuances are part of a trend of municipal overextension. Additionally, public pension funding gaps continue to increase, with the growth of pension liabilities fast outpacing associated pension fund assets. Some economists have expressed that Detroit’s recent bankruptcy filing may be the tip of the iceberg. Freshwater Supply and Demand Freshwater demand continues to increase and is outgrowing supply. The current consumption rate is unsustainable, and demand is increasing for commercial use in activities like hydraulically fractured gas and oil production. Some areas are limiting or even prohibiting these activities. This merger of environmental, political and regulatory issues could potentially force evolution in some business models, as well as everyday household activities, over time. Where to Learn More Mobile Banking: A Departure from Branch Expansion “After Years of Growth, Banks Are Pruning Their Branches,” by Robin Sidel, The Wall Street Journal, March 31, 2013: http://online.wsj.com/article/SB10001424127887323699704578326894146325274.html. “Banking On Technology,” by Ed Sperling, Forbes, September 20, 2010: www.forbes.com/2010/09/17/wells-fargointernet-technology-cio-network-banking_print.html. Food: A Spending Split with Healthcare Implications “A High Price for Healthy Food,” by Tara Parker-Pope, The New York Times, December 5, 2007: http://well.blogs. nytimes.com/2007/12/05/a-high-price-for-healthy-food/. Emerging Middle Class: Shift in Education and Implications Global Employment Trends 2011: The Challenge of a Jobs Recovery, International Labour Office, 2011: www.ilo.org/ wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_150440.pdf. “Not What It Used to Be,” The Economist, December 1, 2012: www.economist.com/news/united-states/21567373american-universities-represent-declining-value-money-their-students-not-what-it. Working Paper No. 285: The Emerging Middle Class in Developing Countries, by Homi Kharas, OECD Development Centre, January 2010: www.oecd.org/dev/44457738.pdf. Protiviti • www.protiviti.com 7
“Sodas a Tempting Tax Target,” by David Leonhardt, The New York Times, May 19, 2009: www.nytimes. com/2009/05/20/business/economy/20leonhardt.html?_r=0. “Fat and getting fatter: U.S. obesity rates to soar by 2030,” by Sharon Begley, Reuters, September 18, 2012: www. reuters.com/article/2012/09/18/us-obesity-us-idUSBRE88H0RA20120918. “Health care costs to bulge along with U.S. waistlines,” by Elizabeth Landau, CNN.com, September 18, 2012: www. cnn.com/2012/09/18/health/us-obesity. Human Capital: The Aging Workforce Introducing Boomers: Marketing’s Most Valuable Generation, Nielsen and BoomAgers, 2012: www.nielsen.com/content/ dam/corporate/us/en/reports-downloads/2012-Reports/nielsen-boomers-report-082912.pdf. Employer Strategies for Responding to an Aging Workforce, National Technical Assistance and Research Center, March 2012: www.dol.gov/odep/pdf/NTAR_Employer_Strategies_Report.pdf. Emerging Risk Spotlight: Social Media Lending “Welcome to the New Reputation Economy,” by Rachel Botsman, Wired.co.uk, August 20, 2012: www.wired.co.uk/ magazine/archive/2012/09/features/welcome-to-the-new-reputation-economy. “Bad Credit? Start Tweeting,” The Wall Street Journal, April 1, 2013: http://online.wsj.com/article/SB100014241278873 24883604578396852612756398.html. The Protiviti View – Continuing the Conversation on Our Blog The risk areas summarized above will continue to evolve, and there is no question that new risks will emerge and affect organizations globally. We are continuing the discussion we’ve started in this newsletter on our blog, The Protiviti View (blog.protiviti.com). This features commentary, insights and points of view from Protiviti leaders and subjectmatter experts on key challenges and risks companies are facing today, along with new and emerging developments in the market. We invite you to subscribe and participate in our dialogue on today’s emerging risks. You also can find additional information on our microsite: www.protiviti.com/emergingrisks. Protiviti • www.protiviti.com 8
About Protiviti Protiviti (www.protiviti.com) is a global consulting firm that helps companies solve problems in finance, technology, operations, governance, risk and internal audit. Through our network of more than 70 offices in over 20 countries, we have served more than 35 percent of FORTUNE 1000® and FORTUNE Global 500® companies. We also work with smaller, growing companies, including those looking to go public, as well as with government agencies. Protiviti is a wholly owned subsidiary of Robert Half (NYSE: RHI). Founded in 1948, Robert Half is a member of the S&P 500 index. About Our Risk & Compliance Solutions We partner with management, board members and outside counsel to help organizations comply with regulatory requirements, respond to situations of noncompliance, and improve the processes around information systems supporting governance, risk and compliance (GRC). We help clients take a disciplined approach to managing credit, market and operational risks through a combination of assessments, process improvement, and model review and validation. Contacts Cory Gunderson Managing Director +1.212.708.6313 firstname.lastname@example.org Jim DeLoach Managing Director +1.713.314.4981 email@example.com © 2014 Protiviti Inc. An Equal Opportunity Employer. PRO-PKIC-0813-125 Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.
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